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20/20 FORESIGHT

Learning the Building Blocks of Service Innovation from SMEs Matt Prindible and Irene Petrick

Delivering service innovation that delights customers is a difficult task. For product-focused companies, even imagining a potential service innovation is difficult. And what is perhaps most difficult is growing through service innovation as a product-focused, small or medium-sized enterprise (SME)— smaller companies typically lack the resources to research, invest in, and survive such a risky transformation. But some manufacturing SMEs have been able to achieve a high level of growth through service innovation, specifically by leveraging digital technologies. These companies combine digital tools in novel ways to support their production and enterprise efforts. When we began our study of how these companies were succeeding with digital tools, what we expected to find were discrete technologies being applied within discrete business functions. What we found, however, were companies extending their original implementation to link multiple parts of the operation, from the front office, through design and engineering, and to production—and then, in many cases, out the door to their customers, as service innovations.

Matt Prindible is an associate at TrendScape Innovation Group and an independent research consultant. His most recent work focuses on digital intensity in manufacturing, understanding the trends, opportunities, and implications of emerging digital technologies, particularly for small and medium-sized enterprises in the next generation of manufacturing. His other research interests include generative design, high-performance computing, and 3D printing. He has also been a part of strategic and innovative technology-driven projects in the finance, pharmaceutical, and entertainment industries. matt.prindible@trendscapeig.com Irene J. Petrick is a Penn State University professor and managing director of TrendScape Innovation Group. An internationally recognized expert in strategic roadmapping, she is actively engaged with companies in their innovation and technology strategy activities, including work with Fortune 100 companies, the US military, and a wide variety of small to mediumsized enterprises. She has over 25 years of experience in technology planning, management, and product development in both academic and industrial settings. Her research interests include technology forecasting, collaborative innovation, and business ecosystem development. Irene is author or coauthor of more than 150 publications and presentations. ipetrick@ist.psu.edu DOI: 10.5437/08956308X5805008

How are manufacturing SMEs achieving this level of sophistication, given their many constraints? And what lessons can larger organizations learn from these smaller companies? What we learned from our interviews is that successful service-oriented innovations often appear simple and obvious in hindsight. But the path to this success is anything but obvious or straightforward. Instead, many of the service innovations we observed evolved over time from a recognition of unmet needs at the customer level, combined with learning-while-doing on the part of the SME. The lessons we took from our work with SMEs, we believe, can serve both SMEs and their larger counterparts. The Example of PoolPak International PoolPak International, a manufacturer of large-scale commercial and industrial dehumidification systems, is emblematic of the approach we found in successful SME service innovators. PoolPak discovered an opportunity to deliver a smart, connected solution to solve a key customer problem: the environment in which dehumidification units are housed can be a dangerous place for humans. Because of this, customers wanted remote access to their units. It’s relatively easy to imagine a solution in today’s world of broadband, pervasive smartphones, and LTE, but even just 10 years ago, the world was much different, and the solution more technically complex. The company created a custom-built solution that combined its existing software-rich controller with an off-the-shelf wireless radio that, quite literally, dialed out to report problems. It was expensive and it didn’t scale, but it was a necessary first step to coupling the product with a service targeted to specific customer needs. And the company learned from the experience, developing more expertise and more sophisticated technical solutions with each generation of equipment and accumulating a wide variety of real-world use cases. As wireless broadband continued to proliferate and sensor prices plummeted, a standard wireless controller became inevitable. The company had been programming world-class HVAC controllers for decades; now, it seized the opportunity to leverage its expertise to cash in on these trends. Although the wireless controller the company Research-Technology Management • September—October 2015

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now uses is commodity hardware, the program it runs, the data it collects, and the analysis it performs are the secret sauce—and those are the products of years of accumulated expertise. The connected HVAC controller is an interface to the company’s core business competencies, not a portal to some magical technological disruption. Today, PoolPak offers a service that provides conditionbased assessment of its dehumidification units that includes the ability to schedule predictive maintenance. PoolPak’s Internet of Things–based service offering is the result of nearly a decade of work in understanding customer needs and developing digitally supported services to meet those needs. Lessons Learned So what does it take to transform a product-based company into a successful service-oriented innovator? In our study, we identified four principles that all companies—regardless of size—should take to heart: • • • •

Appreciate the intangible. Solve real-world problems. Think big, start small. Learn by doing.

Appreciate the Intangible In a product-focused company, innovation is the result of one or a series of technology investments. The return on this investment is linked directly to the value of the features added by this investment. An engineer can predict the gains in performance provided by a new feature, and could likely communicate this value to the client or customer—it’s all very tangible. This logic breaks down in service innovation. For that same engineer, imagining what value that might be added by bundling a product with a service (or changing the business model or distribution channel to reach a customer) is a bit more difficult. In a service-focused effort, the value added by innovation is not directly linked to the novelty of a new technology, or to the features added to a product, but rather may be found in non-technology areas such as relationships, interactions, or interfaces—a much less tangible form. In our PoolPak example, the tangible form was the custombuild solution. But this was expensive and didn’t scale. An engineer could probably predict a time when the technology

Successful service innovation requires a different view of the world and a different language. Value must be expressed in terms of the problem that is solved.

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to make the solution scalable would arrive, but might have a much harder time imagining the different pieces of the business that would have to come together to make the effort feasible and sustainable. Solve Real-World Problems The language of the typical product engineer isn’t problemcentric but feature-centric. Further, the strategic planning approach in a product-focused world favors “fully baked” solutions that limit the ability to incrementally evolve capabilities. But successful service innovation requires a different view of the world and a different language. Service innovations solve problems for customers. Value must be expressed in terms of the problem that is solved at the enduser level. In our interviews with SMEs, we noticed that successful companies had a deep understanding of their customers’ needs and their unique use cases. For most companies, this intimate knowledge comes from field technicians or sales representatives—the people who spend the most time in the customer’s world. Because of this, we saw technology-driven projects around digital services being proposed and led by champions outside of traditional IT and innovation staff. Why? Because these were the people who were able to articulate customers’ real-world problems back to the business. Think Big, Start Small Another common theme we identified in our interviews was the unexpected approach the SMEs took to identifying and applying new technology. The proliferation of inexpensive, reliable computer hardware combined with scalable cloudbased computing infrastructure and software allowed these companies to consider a much larger suite of potential solutions, and the result was a wide diversity in the services offered, both across and within companies. Companies experimented broadly, opting for small projects that built capabilities and opened doors to further developments, in the process developing a keen sense of what their technology and tools could offer both to their own business (for internal projects) and to their customers (as services). It’s an approach in striking contrast to the monolithic, disruptive enterprise information system projects of the past. And it opens the door to an exciting range of creative capacities. One of the companies we interviewed, Drexel Metals, exemplifies the opportunities that may arise from this approach. The company, which manufactures custom metal roofing, has recently completed a major disintermediation of its supply chain. Its new offering, “Metal Roofing on Demand,” moves the company away from a highly centralized operation and taps into the power of local markets, moving production closer to the customer. The transition began with a very small solution to a large technology problem. Coordinating a network of materials and machinery comes with very high information demands, and the same information must be available across the organization—including, these days, on mobile devices in the field. While wrestling with these new demands, the 20/20 Foresight


company turned to Box, a free cloud-based document storage app, to get its information available and up to date across the many devices employees might use to access it. After a few early successes, the company began experimenting with additional Box functionality that enabled rich collaboration with customers. Development of collaboration capabilities continued as an open dialogue developed between what the company was interested in doing and what its customers found useful. Eventually, the effort expanded beyond Box to encompass a suite of microsites and interactive digital tools. Now, local architects and contractors can leverage Drexel’s extensive resources to provide their customers the products and services they need to complete more projects. It’s all beginning to pay off nicely; the company has seen growth of more than 30 percent in the last year alone. Learning by Doing Another remarkably clear theme across the manufacturers in our study: the ability to quickly deploy digital solutions, whether as a response to an unmet internal need or to a latent customer need, yielded key learnings that ultimately led to the development of more formal, larger-scale innovations. We collected many examples of how this bias toward action led to breakthroughs: • Two additive manufacturing service bureaus moved beyond providing access to machines and into formally educating customers in how to optimize their designs for additive manufacturing. • A hardware company with unique product expertise had an arsenal of internal business applications that allowed them to collaborate remotely with a major technology company to co-create their first consumer media service. • Several product-focused manufacturers continually introduced increasingly sophisticated technologies into the organization and are now using the confidence they gained in deploying new technology to approach game-changing industry trends such as robotics and big data analytics. Finally, and perhaps most important, any organization that wishes to deliver successful service innovation must learn

Any organization that wishes to deliver service innovation must learn to imagine all the ways technologies and business goals could come together to solve problems.

to imagine all the ways technologies and business goals could come together to solve problems for both the business and its customers. The first service might take time to develop (as was the case for PoolPak), but after that, matching customers’ needs with creative technology-driven projects can accelerate service development. The feedback loop was obvious: of the SMEs we interviewed, those with the ability (and guts) to quickly match technologies to needs were quicker to identify new opportunities, and more able to exploit them. Looking Forward It’s been exciting to learn from SMEs navigating the complexities of service innovation. We think their laser-sharp focus sheds some new light on the art of service innovation. An organization of any size seeking the same results could profit from considering the unique environment of constraint and discipline combined with flexibility and creativity that powers these SMEs. You’ve taken a more engaged interest in the latent needs of your customers, and your technology people are talking to your sales people. You’re taking the time to understand the tools and technologies already at your disposal, constantly comparing what you’re getting out of them with what you could be. And although your plans for service innovation are strategic, you’re acting on them through small, exciting technology-driven projects. When it all finally comes together, you’ll look back on it and realize that this was just the plan all along.

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20/20 Foresight

September—October 2015

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Learning the Building Blocks of Service Innovation from SMEs